COVID-19 Special: Steps to curb coronavirus transmission will raise construction costs

“The measures to keep Covid-19 transmission low in the construction sector are bound to increase costs for contractors, which they will have to bear in principle.

National Development Minister Lawrence Wong said at a press conference yesterday that construction costs will rise as a result, and all in Singapore must be prepared to bear them.”

Quote from The Straits Times & National Development Minister Lawrence Wong

Our National Development Minister Mr Lawrence Wong made a surprising announcement on 16 May 2020 to state – in his word – that the construction costs for future all projects (residential, commercial, industrial) ‘will rise’ and everyone ‘must be prepared to bear them’.

For those that are aware, we have known for a long time that construction costs has already been rising steadily since 2016 to 2017 period. So this news adds no surprise to a topic which some industry experts are already in the know.

Some questions we need to ask ourselves is;

  1. How will that affect the breakeven/launch prices of future land bid sites?
  2. How will that affect the selling prices of existing developments?
  3. How will this affect you as a buyer?

I hav abstracted the material price indices from Arcadis Singapore for your reading.

As a rule of thumb, we can make a guesstimate of future launch price (psf) of a private residential project via the following:

  1. Land price
  2. Construction cost (Est. $300 psf for OCR, $350 psf for RCR, $450 psf for CCR)
  3. Other costs such as overheads, marketing, etc (Est. 15-20% of construction and land price)
  4. Developer profits (Est. 10-15% of all the cost factored in)

Land price is a variable that will not be very low as developers (especially those are low in land bank) would not bid a low price for fear of being outbid by their competitors. And the URA could also not award the land tender if the submitted tenders do not hit the desired reserve sum (Construction accounts for 3.7% of Singapore’s 2019 GDP).

The other miscellaneous costs also would not have much difference. As for developer profits, the developers could bite the bullet and reduce their profits, but developers are running a business after all and it is highly unlikely for them to reduce their profits by much.

All things being equal, for example, if future construction cost is going up by $50 psf due to the already-known fact that construction cost is going up plus the COVID-19 situation, there’s a high chance that the added psf of around $75 psf will be pass onto buyers.

If this is the case, wouldn’t it be an attractive proposition to consider the current projects in the market? RET

Got a question? Contact Reuel Eugene Tay at +65 9833 6450 for a real estate discussion.

Source:

The Straits Times, 16 May 2020
https://www.straitstimes.com/singapore/manpower/steps-to-curb-transmission-will-raise-construction-costs

Construction Cost Handbook 2020
https://images.arcadis.com/media/C/B/F/%7BCBFC0593-18F0-4EC9-8E1E-1ECDF629A026%7DConstruction%20Cost%20Handbook_Singapore%202020_4_28_2020.pdf?_ga=2.258588620.739408725.1590249849-2015989145.1590249849

2019 Singapore GDP
https://www.singstat.gov.sg/modules/infographics/economy

Published by Reuel Eugene

Real Estate Advisor | Researcher | Asset Progression | Creative marketing

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